If you are looking to startup a new business, or maybe you have already set one up, you are surely aware of all the finances you need to arrange for in order to run a business. But coming about these funds is not as easy as it sounds. You may think you have all the funds you need, only for an unexpected expense to prop up. In such instances, to gather sufficient funding to run your new business, it is wise to turn to external sources of finance other than your own savings.
Two of the many mainstream sources of finance include Crowdfunding and crowd investing. Many often mistake the two to be one and the same and use them interchangeably. In reality, however, there are a lot of differences between the two sources. This article contains a discussion on the properties and the differences of Crowdfunding and Crowd investing.
Table of contents
- What is a crowdfunding website?
- Different types of crowdfunding
- Crowdfunding how does it work?
- Top Crowdfunding sites in the world
- How to benefit from crowdfunding?
- What is crowdinvesting?
- The Types of Crowdinvesting
- How does Crowdinvesting Works?
- Top Crowdinvesting website
- How to benefit from Crowdinvesting?
- In Conclusion
What is a crowdfunding website?
Simply put, Crowdfunding is a strategy of raising capital for your business. In addition, a large number of people invest in startups. Crowdfunding investments are raised with the help of networks of investors on social media platforms as well as dedicated Crowdfunding websites.
These Crowdfunding platforms are responsible for linking the investors with the investees and host the fundraising campaigns as well. Crowdfunding investment is intuitive because instead of relying on large organizations for a single investment. You can raise funds from a pool of investors in small individual amounts. They enable you to procure the funds you need without incurring the liabilities. However, it comes with traditional sources of finance such as bank loans.
Different types of crowdfunding
- Equity crowdfunding- Also referred to as securities-based campaigns. In this type of crowdfunding, investors inject funds into your private company or startup in exchange for stock or other securities.
- Reward-based crowdfunding- A campaign where investors inject money into your startup. In return, once your company takes off, they get access to specific rewards relating to the project
- Donation-based crowdfunding- A type of campaign where your startup when business operations begin. It will provide the investors with tangible rewards such as the first batch of products
- Peer-to-peer lending- A type of campaign where investors can directly lend you money. Without banks or other financial institutions acting as the middleman.
- Hybrid models- a strategy where you combine more than one type of crowdfunding to kick start your business
Crowdfunding how does it work?
To begin your campaign, you have to first list it on one of the many popular crowdfunding platforms; More on that later. These Crowdfunding websites host your fundraisers and help you connect with potential investors. Once the financial pledges for your campaign have gone through, the Crowdfunding platform will be responsible for the pledged amount to be collected.
In return for hosting your campaign and offering secure transactions, the Crowdfunding websites charge you a fee. This fee is usually a percentage of each individual pledge that goes toward your campaign.
Typically, crowdfunding platforms impose an all-or-nothing funding policy. You will receive the amount from the campaign if it met its goals. If not, the money goes back to the investors.
You can read more about How To Create a-Successful Crowdfunding Campaign Crowdfunding campaign.
Top Crowdfunding sites in the world
The following are some of the best Crowdfunding websites available to you
- Kickstarter- a household name in term of Crowdfunding platform; best known for hosting campaigns for tech and creative entrepreneurs
- IndieGoGo- second only to Kickstarter; known for hosting campaigns for innovations in technology, creative projects, and community projects
- CircleUp- equity capital raising campaigns thrive on this Crowdfunding website, especially if you are starting a consumer brand
- LendingClub- oneof the only Crowdfunding platforms enabling peer-to-peer lending
How to benefit from crowdfunding?
- One of the biggest advantages of Crowdfunding is that you do not have to give up power and control over your business in exchange for seed money from venture capitalists.
- Additionally, running a campaign is a fast and easy process and does not require any fees upfront.
- Last but not least, not only will the publishing of your Crowdfunding campaign act as a great marketing tool. In addition, your investors will also be likely to become loyal customers of your brand. This is because they invested in your business in the first place only because they believed in and shared your vision.
What is crowdinvesting?
Essentially another name of crowdsourcing is crowdinvesting. It is a type of crowdfunding where the investor will be receiving a share of stock in your private company. or some other securities in exchange for their investment.
The Types of Crowdinvesting
- Regulation D CrowdInvesting- Imposes no limits on how much you can raise or the number of investors in a pool. It is important, however, for the investors to be accredited.
- Regulation A+ CrowdInvesting- You are permitted to raise anywhere from $20 to $50 million from investors. These investors can be both accredited and unaccredited. In this type of crowdinvesting, you can first test the water. In other words, gauge the level of interest from investors before launching your campaign fundraising.
- Regulation CF CrowdInvesting- Used by most crowd investing platforms. Here you can raise up to a million dollars within a year. Like in Regulation A+ crowd investing, investors here too can be both accredited and unaccredited.
How does Crowdinvesting Works?
After launching your campaign on a crowd investing platform, you can immediately begin raising money from many investors. In exchange for their seed money, investors are given ownership as opposed to only rewards. Every single investor will be given a small fraction of the equity in your company.
Top Crowdinvesting website
- SeedInvest– Is is a commission-based platform that charges 5% to 7.5% of the total pledges as their fee. You may also be charged for warranty coverage, which will amount up to 5% of the total pledges. SeedInvest mainly supports technology and consumer product startups.
- EquityNet– Is a subscription-based website that does not charge a commission on total pledges to your campaign. Starting subscription packages will run you $300 per month. This platform looks for pharmaceuticals, food services, and agriculture, hotels and hospitality, and financial services.
- Fundable– also subscription-based, where a basic subscription package with run you $179. Fundable lookout for startups in software, real estate, gaming, and consumer products, etc.
- Crowdfunder- another subscription-based platform, with subscriptions starting at $399 per month. Investors on this platform have to accredited, and as such average value of pledges is higher. Crowdfunder supports consumer products, software, health industries, and so on.
- WeFunder– a commission-based platform, which charges 6% of the total pledges. To enlist your campaign, you have to pay an additional $195 listing fee. WeFunder will allow you to keep your pledges only if your campaign can reach at least $20,000.
How to benefit from Crowdinvesting?
The many benefits of crowd investing include
- A quick and debt-free way of acquiring capital for your business
- Allows you to generate more funds than you would receive through a loan
- Limited liability
Both Crowdfunding and crowdinvesting are great alternatives for traditional sources of finance. Both allow you to raise seed money for your business without incurring debt and liability. However, if you wish to keep control of the company with yourself, crowdinvesting may not be the right source for you. This is also true if you cannot afford to purchase subscription fees. As well as paying off commissions from the pledges you have received. In these scenarios, the better option for you will be launching a Crowdfunding campaign on Kickstarter or IndieGoGo.
On the other hand, if you have the wiggle room for the surcharges of crowd investments, and the dilatation of power does not matter to you, the better option for you will be a well-structured crowd investing campaign hosted on a popular platform.